News analysis

Copper

A metal with a bright future

ALL that glisters is not gold, as the old saying rightly affirms—because at the moment, copper is shining too. Last week the price of gold surged past $1,400 an ounce, but for pure performance copper is the clear recent winner. Since the middle of the year the price of gold has risen by a decent 13%; copper, on the other hand, has soared by 35%. Stocks of copper at the London Metal Exchange (LME) are down to 8 days of global consumption; add in holdings at Shanghai's exchange and producer stocks and it creeps up to close to a fortnight.

On December 3rd rumours circulated that JPMorgan bought up warrants for more than 50% of the LME's copper stocks, probably in readiness to launch a physically backed exchange-traded fund (ETF), a popular investment vehicle for gold that is now set to spread to a wide variety of base metals. The race to launch copper ETFs is swiftest because it is the metal in shortest supply. China's mammoth demand for copper—it sucks up 40% of world supplies—has not been matched by fresh supplies. New copper deposits are thin on the ground. As older mines get deeper and the choicest parts of deposits become exhausted, ore grades have declined. In all, there has been very little net growth in supplies for several years.

Plumbers are steadily switching from copper pipes to plastic ones; and the Chinese have found a way of substituting the metal with cheaper aluminium in air-conditioning units. Despite this, demand for other uses is still set to outstrip supply, and prices to rise, in the next couple of years or so. This makes copper alluring to the investor—hence the slew of ETFs backed by physical copper that are set to be launched. BlackRock, Deutsche Bank and ETF Securities hope to join JPMorgan in offering investors exposure to physical copper. This too is sure to push prices higher as the funds take copper off the market at a time of tight supply. If regulators can be persuaded to set aside their objections and allow these ETFs to trade, copper, currently trading at over $8,750 a tonne could be pushed up beyond $10,000 according to RBS, a bank.

Other are not so sure. Investors, who can already invest in copper through the futures market, may not want the reassurance of holding physical supplies. Unlike gold it is far too bulky to be of use for slipping a couple of bars into a case and making a dash for the border. Its bulkiness means it costs more to store. But even if investors aren't keen on copper ETFs the laws of supply and demand are set to push prices higher anyway. For now, that is. Those same laws have started to prompt investment in developing new copper mines and expanding existing ones. From 2012, as this extra supply comes on to the market, the metal may begin to lose its lustre.

Strange choice of an opening sentence. If you're going to use the Shakespearean spelling of "glisters", why not directly attribute the quote, instead of labelling it as an "old saying". Secondly, the meaning of the quote is pretty much directly opposite of what is being implied by its use here. The original implication was that things which glitter but are not gold do not hold the same worth as gold, which is not the implied meaning here.

What's said, but not discussed, in this article is that speculation, especially now that we have speculation for the masses in the form of ETFs, is likely the main driver behind the jump in metals prices. In the old days, if you wanted to go long in metals you had to either hold the physical metal yourself or buy mining stocks. Now the ETFs purport to give us essentially a metal-backed currency. There is a lot of suspicion out there that the ETFs don't really hold sufficient physical metal, that much of it is leased, and most critically, that in some cases the same physical metal is leased to more than one party. In other words, the ETFs may be as rotten at the core as CDOs and SIVs were at the height of the US mortgage fraud. Metal ETFs have become popular because they essentially provide old-fashioned hard money that the modern fiat currencies do not. The problem is that even an old-fashioned one dollar Silver Certificate was not a silver dollar, and a $20 bill was not a $20 gold piece. The US Silver Certificate promised that it represented "One dollar in silver payable to bearer on demand", which is essentially what the ETFs do as well. The problem is what happens if everyone demands at the same time? Then we'll find out how real the backing of the ETFs actually is. I suspect that only a long-term downward drift in the price of gold, silver, or copper will expose the fraud, if there is any, behind them.

Meanwhile, the phony demand of the ETFs takes metals out of the market and artificially raises there prices. For gold, this may not be a big deal, because the value of gold in industrial products is minimal (hair-thin bond wires on a computer chip, for example), but for copper this is a huge deal since until now all physical copper went fairly directly to physical use. Now, with speculators apparently buying up 50% of production, speculation will drive prices as much as actual use does. I don't know of a good solution to this, but is seems certain to produce many bad results and very little in the way of good, outside of profits for some speculators and miners. One miner that did really well out of this is Grupo Mexico, who bought Asarco just to get Southern Peru Copper, back when copper was 50 cents a pound. With US regulatory approval, Grupo then spun off Asarco's US operations, burdened with 120 years of legacy environmental liabilities, into bankruptcy, and kept Southern Peru Copper.

Lucano and Ohio, US nickels are still 75% copper, despite the name, and are worth as scrap well above their face value currently. One still gets solid copper pennies in circulation, but nickels are far more available and easier to hoard since you don't have to look at the date, or scrape the edge off of them.

I'd also like to mention that ore grades in modern copper mines are very low. During the first copper boom, when the advent of electric power and telephones spiked the demand for copper, mines were extracting ore with grades in the hundreds of pounds per ton. Most of them were underground mines, at least initially, though some were re-worked into open pits, such as the Berkely Pit in Butte and the Lavender Pit in Bisbee. Miners worked high-grade veins underground using traditional drifting and stoping. Nowadays virtually all primary copper producers are huge open pit mines, often a mile or more across, with ore grades running in the range of a few pounds per ton. Mining such low-grade ore profitably results in environmental destruction on a vast scale (even if there's no external pollution, removing entire mountain ranges and river drainages along with everything that once lived there surely counts as environmental destruction) and it requires lots of low cost petroleum.

Labor is minimal, per ton, thanks to mechanization, but the big mines use lots of ANFO and big yellow machines, all of which have costs of operation that are tied directly to petroleum prices. It's not just diesel oil for the trucks and blasting. Some remote mines have their own diesel-powered electric generating plants. The huge tires for mining equipment are very expensive petroleum products, and there was a severe shortage of them a couple of years ago. Even the blasting agents are all made from petroleum. Furthermore, mines in remote places mean that everything must be hauled in and out along long roads. What we have is a cost of mining that is very nearly directly proportional to the cost of petroleum, and more so than with underground mines or mines with higher ore grades.

It may well be that as we approach "peak oil", low grade open pit mines will have to be abandoned in favor of underground mines following what few high-grade veins remain. Alternatively, open pit mines located near cheap electricity and transportation, and perhaps even near end users, will be the only ones that will be economical. The catch there is that open pits miles across do not make good neighbors to anyone. Even if someone wanted to re-open the legendary Butte mines, the fact that all the surface ground is settled and built up would make it very difficult.

The easy copper is gone, although there is lots of copper left in good veins that can be mined laboriously if we're willing to dispense with many environmental regulations and wilderness preservation. We're not to that point yet in the US, but copper is a very useful element and future generations may feel differently about it.

It is time that ordinary folks fight back against the speculators and hoarders on everything from food, energy, commodities, currencies, and what not. and whose only questionable function is to make a pile of money for themselves at everybody else expenses. However ordinary folks are far too diffused a force to fight the baddies and hope must be laid squarely on the State powers to protect the interests of consumers.

What a fine observation of your saying: “There is a lot of suspicion out there that the ETFs don't really hold sufficient physical metal, that much of it is leased, and most critically, that in some cases the same physical metal is leased to more than one party. In other words, the ETFs may be as rotten at the core as CDOs and SIVs were at the height of the US mortgage fraud.”

In my view, copper ETF is but another quick scheme of skimming money from average investors a la CDS and other financial derivatives before the financial ground zero a couple years ago.

And this too shall come to pass, most likely bubbled or busted, I think.

Major financial houses such as JP Morgan need new products (in addition to gold, silver, platinum and other precious metals like palladium) in their profit making repertoire and copper is a judicious choice among basic metals because it offers good currency (it’s not as strategic a material and is therefore less controlled, plus the US has by far the second largest ore deposit reserve after Chile), and because of its hard portability (thus the ETFs).

But there are things working against copper speculation for such applications. Industrial utilization of copper is on the decline relative to GDP growth (For example, from 1998 to 2005, total refined production of copper has gone from 14,142 k tons to 16,631 k tons, representing annual growth of less than 2% while the GDP growth for the same period is much higher.)

With some exceptions of course, cheaper and greener substitutes for copper are on the rise. For example, a grain of sand (upon processing into light carrying fibers) carries a lot more of information bits in transmission than would copper of the same weight at nominal temperatures. Fiber-to-the-home now replaces Copper cable-to-the-home and the proliferation of broadband wireless further reduces the need of copper.

And more and more plastics or cheaper metals are replacing copper in everyday consumption like refrigeration and plumbing as the article has correctly related.

In my opinion, in such deploy of JP Morgan, copper, like with many a scheme of speculation, the first few investors of ETFs will probably make a bundle, with the bundled mass follower investors holding the bag in the end of the bubble.

Gold for April delivery soared $20.90 to $1,353 an ounce at the Comex division of the New York Mercantile Exchange.
Rising oil and food prices are likely to have a significant impact on inflation outlook in 2011.

High global commodities prices are likely to have a significant impact on gold prices. The investors will by much more gold amid fears of inflation. As inflation fears rose to a record high in China, India and EU the price of metals, gold, oil , copper will rise. The investors will continue to buy safe assets. Albanian Minerals President & CEO Sahit Muja said “We are positive on growing metal prices". The price of metals should continue to be supported by demand driven by global economic growth a huge investment's in infrastructure and energy sector worldwide.

Inventories of copper shrank this year as demand recovered, pushing prices to a record $10,000 a ton. Global demand will outstrip production. The inventories copper, aluminum, chrome ore, nickel , ferrochrome and iron ore are at the lowe's level this year. Metal prices will rise sharply in 2011 do to the growing demand and higher energy costs.
Albanian Minerals in New York is receiving a record new orders for row minerals, copper, nickel, chrome ore and iron ore for 2011

Copper prices hit $10,000 a tonne on Thursday for the first time as investors piled into the metal amid fears of a severe supply shortfall.
Copper is widely used in manufacturing , construction and energy, Copper is crucial to the global economy

Albanian Minerals expects China, US and Germany the world's largest consumers of Gold and cooper to return to the market to purchase more of gold and copper.

Chinese companies will run down their inventory levels in 2011.
Copper stocks are not high enough in US, EU, China and India.

China and Germany will need to continue to import more copper as manufacturing and exports are growing
The copper consumption levels in US and Europe will continue to grow.
As copper prices hit a record, other metals surged.
Albanian Minerals